New cotton program shakes up Southern agriculture

Cotton growers say their new farm program payments will provide badly needed income support without the threat of foreign retaliation that forced them to give up their old policy.

But the new cotton program, which was included in the newly enacted congressional budget agreement, will result in smaller payments to peanut growers, forcing them to decide quickly whether to cut back planting of that crop this spring.

The budget deal included a provision sought by the National Cotton Council and shaped by the House Agriculture Committee staff that makes seed cotton eligible for the Price Loss Coverage at a reference price of 36.7 cents per pound. Seed cotton is unginned cotton that includes the seed, which is used for animal feed and cooking oil, as well as the fiber.

The price of seed cotton is expected to average about 31 cents this year, well below the PLC payment trigger, and remain at about 33 cents in the following years, according to the University of Missouri's Food and Agricultural Policy Research Institute.

The Congressional Budget Office estimates that the program will trigger nearly $3 billion in payments over the next 10 years, or about $300 million a year. To cover that cost, the budget deal requires reallocation of “generic” base acres, 17.5 million acres that were assigned to cotton prior to the 2014 farm bill, and makes farmers who participate in PLC ineligible for the Stacked Income Protection (STAX) revenue insurance program for cotton.

Texas farmer Shawn Holladay

Shawn Holladay, who farms near Lamesa, Texas, south of Lubbock, welcomes the new PLC provision but says the reference price is still below the break-even price for growing cotton, which is over 40 cents a pound when calculated on the price of seed cotton, he said.

“It’s a stopgap to keep you within striking distance (of the break-even price) when times are hard,” Holladay told Agri-Pulse on the sidelines of the National Cotton Council’s annual meeting last weekend in Fort Worth. House Ag Committee Chair Mike Conaway, R-Texas, was greeted with a standing ovation when he was introduced to speak at the meeting.

The new program “will keep the farmer on the farm,” said Robert Lacy, president and CEO of PYCO Industries, a Lubbock-based cottonseed processor. “We had a lot of farmers go broke and get out of the business.”

Cotton growers opted not to participate in PLC or the Agriculture Risk Coverage programs that were created in the 2014 farm bill because of the successful trade case that Brazil brought against U.S. cotton policy in 2002. Cotton farmers decided instead to rely on the STAX insurance policy, but indemnities turned out to be minimal, in part because of farmers' relatively low yield histories.

Some economists say the new program is likely to get scrutinized by Brazil: “To the extent that the new programs provide subsidies to cotton producers (which seems to be their objective) then they are potential violations of the U.S. pledge at the WTO,” Dan Sumner, a University of California-Davis economist who advised Brazil in its WTO case against the old cotton policy, said in an email to Agri-Pulse.

He added, NCC “has not been a reliable predictor of WTO outcomes with respect to cotton.”

But the cotton industry argues that the new PLC provision will be much easier to defend at the World Trade Organization, even if Brazil decides to bring a new case. For one thing, the global cotton market and the U.S. role in determining production levels and prices have changed significantly in the past 16 years, said John Gilliland, a lawyer with Akin Gump who advises the National Cotton Council on trade policy.

John Gilliland, Akin Gump

Since 2002, India has surpassed China and the United States to become the leading producer of cotton, the Chinese government policy is playing a larger role in determining global cotton prices, and competition from man-made fibers is having a growing impact on cotton demand, the U.S. industry argues.

The new cotton policy also is significantly different than the old mix of programs, which included the Step 2 payments to cotton exporters, Gilliland said. The new PLC reference price is based in part on the price of cottonseed to make it more difficult for Brazil or another country to argue that PLC payments would be distorting global production. While 75 percent of U.S. cotton lint is sold for export, the seed is used domestically as feed for dairy and beef cattle and as a vegetable oil for making snack foods and other products.

“We need the seed cotton designation to get around some of the WTO rules that we ran into” under the previous cotton program," said Jesse Flye, who farms near Jonesboro, Ark. “This is a way to give us a safety net and not to be, hopefully, on the other side of any WTO rules.”

The prices of seed and lint often move in different directions, depending on market demand. The price of cottonseed is currently depressed because of a slump in milk prices that has reduced demand by dairy farms, industry experts say.

What is not in doubt, according to economists, is that the new cotton policy will have an impact on U.S. peanut production. Farmers have significantly increased peanut acreage under the 2014 farm bill because of a combination of the relatively high PLC reference price and the fact that they could get peanut payments on their former cotton, or generic, base acres.

But since the new policy abolishes generic acres, farmers will be eligible for PLC peanut payments only on the acreage they had in peanuts prior to the 2014 farm bill.

Holladay, the Texas farmer, has been planting about 1,000 acres of peanuts, mostly on generic base, and expects to start cutting back. “Losing the generic acres (means) you lose that support mechanism,” he said.

Bart Davis, who farms near Albany, Ga., said he expects farmers in south Georgia to reduce their peanut plantings as well because of the policy changes. “Cotton wouldn’t cash flow, the peanuts would, so that’s what they did,” he said.

With a reduction in peanut acreage, “hopefully, it will help the price of peanuts go up and we’ll get a better contract on them,” said Davis.

Farmers planted nearly 1.9 million acres of peanuts last year, compared to less than 1.4 million acres in 2014. Because of the relatively high PLC reference price of $535 per ton - market prices have been closer to $400 a ton - government payments for peanuts totaled about $341 an acre from 2014-2016, far more than for any other crop, according to the Congressional Research Service. By comparison, government supports totaled about $63.96 an acre for corn and $23.40 for soybeans during that period, CRS said.

Georgia growers appear to be expecting peanut prices to rise. Some shellers have had to pull back offers for contracts at about $400 a ton because they weren’t getting enough farmers willing to accept the price, said Stanley Fletcher, a University of Georgia economist who tracks the financial situation of representative peanut farms from Virginia to New Mexico.

Farmers in Georgia planted 835,000 acres of peanuts in 2017, up from 720,000 in 2016. Fletcher believes Georgia farmers will reduce peanut plantings by about 100,000 acres, and growers in other states are likely to reduce acreage, too, he said. Plantings in South Carolina, where farmers planted 120,000 acres of peanuts last year, could be cut in half, he said.

Fletcher estimates that peanut growers needs to return about $550 a ton on peanuts to cash flow.

“There will be a drop” in peanut acreage, said Fletcher. “If there’s not, there’s going to be a big bloodbath at the end of the season."

This week’s guest on Open Mic is Dr. Jayson Lusk, Distinguished Professor and Head of the Agriculture Economics Department at Purdue University. With heightened debate on food and farm policy surrounding the development of a new farm bill, Dr. Lusk offers challenging insight about the relationship between political persuasion and food, work requirements for SNAP recipients and evolving preferences in meat consumption.

The House Agriculture Committee was set to mark up a new farm bill next week, but Democratic objections over planned nutrition changes have caused a delay. Agri-Pulse's Phil Brasher and Spencer Chase have more on that and a fix to the GOP tax bill in this week's video.

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